It Happened in Cyprus and Now in Poland. Why Would the U.S. Be Any Different?

By Michael Lombardi | Small Business

The U.S. national debt has increased significantly over the last few years, especially after the credit crisis struck the U.S. economy.

To stop the economy from totally collapsing, the U.S. government incurred several trillion-dollar budget deficits in a row as it spent to revive the economy. As yearly budget deficits piled on, the U.S. national debt rose. Today, the U.S. economy has the biggest debt in monetary terms than any other country in the global economy. In fact, if you add together the national debt of Greece, Spain, Portugal, and Japan, collectively, their debts are less than the national debt of the U.S. economy.

What happens next?

At present, the U.S. government is making payments on its old debt by simply borrowing more debt. Hands down, this is the biggest Ponzi scheme in play. But as I have written before in these pages, our national debt-to-gross domestic product (GDP) is only 105%. In Japan, the national debt-to-GDP is 205%. Hence, if we follow Japan’s example, our debt could double from here.

The U.S. government should hit its debt limit in October. And Congress will increase that debt limit as it always does.

Eventually, the only way to reduce the national debt, especially if interest rates rise, is to raise taxes. But it is a double-edged sword. Raise taxes and you stifle the U.S. economy, as higher taxes negatively affect consumer spending. Don’t raise taxes and you still have a problem with a mounting national debt.

Will the U.S. come out with some law that if a group of citizens or a corporation has a certain amount of cash, they will get a special tax assessment on capital? This action makes more sense than an across-the-board tax increase.

It happened in Cyprus. Now we hear something similar is being done in Poland. To help its national debt situation, the Polish government has decided on reforms that move bond assets from private to state funds. Private pension funds are saying the move is unconstitutional. Crazy, but true; this is what is happening in Poland. (Source: Reuters, September 4, 2013.)

In the case of the U.S., I don’t think we have to worry about special tax assessments right now. They will be a thing of the future, not today. If we follow Japan’s route—and it looks like we are—we can add another $15.0 trillion in debt before the government gets desperate (save and except sharply higher interest rates or a total collapse in the value of the U.S. dollar).